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GBP/USD trims gains ahead of FOMC on soft UK wages data

The slide in UK wages has overshadowed an otherwise decent jobs report as the rate of unemployment fell to a 12-year low. As a result, the GBP/USD came off its highs. Traders are taking no chances ahead of US data in the afternoon and the Fed’s rate decision in the evening. With the Bank of England also set to deliver its own policy decision on Thursday, it could be a – dare I say, much needed – volatile 24 hour period for the cable.

Soft UK wage growth overshows news unemployment rate drops to lowest since 2005

According to the ONS, average weekly earnings in the three months to January eased to 2.2% year-over-year from 2.6% in December; excluding bonuses, earnings fell to 2.3% from 2.6% previously. Both figures were weaker than expected, causing the pound – which had risen sharply at the London open – to ease off. Meanwhile the unemployment rate unexpectedly fell to a 12-year low of 4.7%. On top of this, the number of applications for unemployment benefits fell in February by a good 11.3 thousand, significantly more than 5 thousand expected. Overall, though, it was a mixed-bag day for UK data and with the weak wages data undermining bulls’ confidence. Indeed, in the 15 minutes after the data was released, the GBP/USD had given up 40 pips and was off some 65 pips from its earlier highs.

All eyes on FOMC: 0.25% rate rise almost certain

But the UK wages and employment data was never going to be the key focus in the wider FX markets today. We have US Consumer Price Index (CPI) coming up at 12:30 GMT. This, too, isn’t going to be the key focus. Well, unless there is a significant deviation from the expected flat month-over-month reading. It is the FOMC rate statement at 18:00 GMT and Janet Yellen’s press conference half an hour later when we should see volatile price swings. A 25 basis point rate increase is almost certain. If the Fed doesn’t deliver the rate rise, it sure will shock the markets and cause the dollar to collapse. Put another way, a rate rise of 25 bp will not surprise the market. So, the dollar may not necessarily rise. In fact, the dollar could fall if this turns out to be a ‘dovish hike’: a rate rise accompanied by dovish comments about the future trajectory of rate hikes. Two more rate rises are currently expected in 2017, one in June and another in December. If the Fed refuses to indicate that it will embark on a more aggressive rate hiking cycle then this may undermine the dollar and underpin GBP/USD. Conversely, if the Fed comes across as more hawkish than expected then the dollar could surge higher.

Dollar remains fundamentally supported but GBP/USD could still bounce

Indeed, no other major central bank is currently as hawkish as the Fed. Thus, fundamentally the dollar remains well-supported. In contrast, the Bank of England is still pretty much dovish. The BoE will almost certainly leave its policy unchanged on Thursday. It will likely mention heightened Brexit uncertainty and weaker wage growth as reasons to justify leaving monetary policy extremely accommodative despite a pickup in inflation. It should be pointed out though that the BoE’s dovishness is expected. Therefore, there is a possibility we may not see further weakness in the cable.

It is possible, actually, that we may see a strong short-covering rebound in the GBP/USD in the next 24 hours or so. At least that is what the chart is telling me. The GBP/USD has created lots false breakouts (or fake outs) in recent months, trapping traders in one direction before going the other. The most two obvious examples of this can easily be seen on the chart around 1.20 in mid-January (when sellers were trapped) and around 1.27 in February (when buyers were trapped). Another such trap may have been set for the sellers on Tuesday when the cable momentarily broke below the 1.2140 support level before bouncing back sharply. The GBP/USD now needs to clear resistance in the 1.2245-65 range if we are to see a move back towards the middle or upper end of the wider range again. But if the cable were to form a new low beneath 1.2110, then all bets are off. In that potential scenario, we may see an eventual drop to that 1.20 handle after all. 

Source: eSignal and FOREX.com

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